Infra firms staring at liquidity crunch, project delays

V Rishi Kumar Hyderabad | Updated on March 31, 2020 Published on March 31, 2020

Small and medium firms more vulnerable

Construction and infrastructure companies are in for tough times ahead, with liquidity concerns having a cascading impact on their businesses.

Interaction with sector companies, analysts and rating firms brings out some near-term concerns for the sector.

Liquidity concerns

YD Murthy, Executive Vice-President Finance,NCC Ltd, said, “Faced with liquidity concerns and delayed payments, the next few months are going to be tough for infrastructure companies. The government, which is the biggest order giver, has been focussing on preventive measures against the coronavirus and rightly so.”

“This focus of government implies that all payments to companies will be delayed. This will delay project progress,” Murthy said.

“In FY 2020, the construction sector lost four-five months to general elections and stoppage of work during monsoons. Covid-19 has the potential to halt works for at least a few months, going ahead. This is a bad phase for small and medium sized companies without additional liquidity,” he said.

Project delays

Jagannarayan Padmanabhan, Director, Transport & Logistics, Crisil Infrastructure Advisory, told BusinessLine: “Most of the road projects are based on either EPC contracts or hybrid annuity model and cash flow is critical for their implementation. Given the impact of the lockdown, this will have a major impact on many of the medium-sized companies who do not have much fall back options.”

“While it is hard to predict how long the lockdown will impact the sector, the last quarter of FY 2020 had already taken a hit and the first quarter of FY 2021 may also be impacted, even if the lockdown is lifted on April 15. The migrant workforce is critical for the implementation of highway and major construction projects,” Padmanabhan said.

“Likewise, work on the ongoing airport expansion projects in Delhi, Bengaluru, Hyderabad and the new Navi Mumbai airport may be impacted by the current situation,” he said.

“Most of the construction work across major cities has been stalled. However, in some sites, we are continuing to work like in the Nagpur-Mumbai Expressway where there are four fronts. This will continue till supplies last. Workers who are comfortable staying there are at work,” Murthy said.

In an outlook report on the construction sector issued today, rating firm ICRA has predicted “significant near-term cash flow stress expected in the construction sector due to Covid-19 impact.”

Labour migration

Shubham Jain, Senior Vice President and Group Head, ICRA, said, “Even before the complete lockdown was implemented in the country, for preventing the spread of Covid-19, some States had started putting restrictions in place. Some of the States have also announced relief packages to provide financial support to labourers and construction workers.”

“Recent developments witnessed labourers migrating to their hometowns, thus impacting construction activities. Even if the lockdown is not extended, increased risk aversion could result in labour shortage in the first quarter as the return of the migrant labourers will be gradual. Raw material availability could also emerge a constraint,” Jain said.

Jain added, “While the cash flows of contractors will be adversely impacted, the recent measures by the RBI, including three-month moratorium on term loan instalments, do provide some comfort. ICRA will continue to monitor the situation for various parameters like liquidity position, collections from clients, support from promoters, and any further policy level support from the government/RBI.”

Peak season halt

A statement from Motilal Oswal said, “Execution halt in peak season is likely to impact revenue growth and the lockdown has brought construction activities to a halt in the peak season. March is a peak month for construction activities in India.”

“Even after the lockdown ends, there might be some delays in resuming construction activities in full swing as labour, machinery and materials would need to be re-mobilised. Thus, we see a clear risk to our revenue growth in 4QFY20 as well as FY21E estimates,” it added.

Published on March 31, 2020

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